HK shares hold steady; SMIC up on share sale report

* HSI hovers as investors book gains on previous rally * Lenovo slides on IBM share sale, JP Morgan downgrade * SMIC rallies 11 percent on report of stake sale

(Updates to close)

By Parvathy Ullatil

HONG KONG, July 22 (Reuters) - Hong Kong shares flitted in and out of negative territory before closing flat on Tuesday, as investors locked in gains on a four-session, 6.4 percent rally after oil prices rose, but shares in Lenovo (0992.HK) slid after IBM (IBM.N) sold a stake in the Chinese PC maker.

Turnover on the exchange was the third lowest this year, with investors expecting Wall Street to fall overnight after a raft of U.S. companies, including American Express (AXP.N), Apple (AAPL.O) and Texas Instruments (TXN.N) announced dismal earnings growth after the closing bell on Monday.

Shares in Lenovo (0992.HK) slid more than 5 percent after U.S. computer giant IBM (IBM.N) sold a 1.3 percent stake in the company for around $77.3 million and JP Morgan downgraded the stock on slowing Chinese demand.

But shares in Semiconductor Manufacturing International Co. (SMIC) (0981.HK)(SMI.N) jumped 11 percent on a news report that Datang Telecom group may buy a 20 percent stake in SMIC, the nation's biggest contract chip maker. [ID:nSHA307114]

The Hang Seng Index .HSI closed 5.42 points lower at 22,527.48 after vacillating between 22,690.74 and 22,393.14 earlier.

Mainboard turnover fell to HK$51.9 billion ($6.7 billion) from HK$69.6 billion on Monday.

"Wall Street looks set for a correction tonight and that seems to have made investors cautious. The rally in financial shares was not expected to last very long anyway," said Conita Hung, head of equity markets with Delta Asia Financial Group.

The China Enterprises Index .HSCE of top locally listed Chinese firms fell 0.1 percent.

CNOOC (0883.HK) ended 0.7 percent higher but off its day's peak, after fears that a tropical storm could hit U.S. offshore oil installations sent crude over $131 per barrel.

Esprit (0330.HK) dragged the main index lower, falling 2.3 percent after the company's deputy chairman and group CFO, John Poon, resigned with effect from July 20, ahead of the company's results in August. Analysts said the company had denied any connection between Poon's resignation and a potential earnings disappointment.

Shares in the smaller of China's two mobile network operators China Unicom (0762.HK) slid 2.3 percent after it reported a significant decline in CDMA subscriber additions in June.

The China Enterprises Index .HSCE of top locally listed Chinese firms fell 0.12 percent.

Higher oil prices ended a rally in airline stocks, with Air China (0753.HK) giving up 3.4 percent and Cathay Pacific Airways (0293.HK) dropping 3.2 percent.